(FORTUNE Magazine) – As the stock market slumped through the early part of spring, at least one seemingly bullish signal emerged: A trio of blue chips announced big buying plans. On April 26, IBM said that its directors had approved $5 billion in share buybacks, the largest such authorization in the tech giant's history. A week earlier Merrill Lynch had unveiled a $4 billion repurchase program. And four days before that, Citigroup said that its board had sanctioned another $15 billion in buybacks.

Yes, corporate America is on a stock shopping spree. After two years of hefty profit growth and cautious spending, company coffers are flush with cash. Managers looking to redistribute that money have not only been upping dividends but heavily buying their own stocks. Repurchases by S&P 500 companies last year totaled a record $197 billion, up from $131 billion in 2003. That sum well exceeds the $181 billion spent on dividend payments in 2004, according to Standard & Poor's. Repurchases this year should climb higher still. "It's definitely going to set another record," says Howard Silverblatt, equity-market analyst at S&P. Among the other companies announcing multibillion-dollar plans in recent months are Applied Materials, Bank of America, Dell, Duke Energy, Home Depot, MBNA, and Yahoo.

Yet while buybacks are typically trumpeted as a positive sign for investors--an indication that those who know the business best think the stock is a bargain--even large buyback plans don't guarantee a bonanza. It's true that when the stock outstanding is reduced, each remaining share represents a greater stake in the company. As a result, earnings per share can rise even if overall earnings remain unchanged. But just because a company authorizes a repurchase plan doesn't mean it will actually go through with it. And even if the company does start buying, it might not do enough to shrink the number of shares.

That's because buybacks are often initiated to offset new shares issued as the result of acquisitions or, more significantly, employee stock-option exercises. For example, tech companies, which liberally dole out options, last year accounted for more than a quarter of all stock repurchases, even though they represent only 15% of the S&P 500. In fact, most buybacks done in 2004 were intended to cover employee stock options, according to Standard & Poor's; fewer than one in four S&P 500 companies actually reduced their share count. And other factors can also affect the value of a buyback. Some companies are now borrowing hefty sums to buy back shares, potentially weakening the businesses financially.

How then to separate meaningful buybacks from empty promises and marketing gimmicks? David Fried, president of Fried Asset Management and editor of The Buyback Letter, says the key is to look beyond the headlines and see which companies have actually reduced their available stock. That information can be found in quarterly and annual financial statements, which list the number of common shares and detail how much a company has spent on repurchases. But Fried, whose newsletter portfolio has gained 16% a year since 1997, uses shrinking share numbers only as an initial screen. Once he comes up with a list of companies making significant buybacks, he narrows it down by identifying those that have strong cash flow and trade at attractive price/earnings multiples.

Currently the money manager favors a pair of specialty retailers. Home Depot (HD, $36), which in February authorized $2 billion in repurchases, has bought back more than 3% of its shares over the past fiscal year. "Earnings continue to increase," Fried says, "and now, on a trailing-operating-earnings basis, it's as cheap as it's been in a decade." The home-improvement giant also trades at just 14 times its projected earnings for the current fiscal year.

Fried likes AutoZone (AZO, $84), too. In recent years the company has bought back stock aggressively: The number of outstanding shares has been cut by more than 40% since 2000. "AutoZone is a prime example of a classic buyback, where they have cash flow that exceeds their needs to grow," Fried says. The auto-parts seller's stock plunged more than 13% in mid-March when it reported slumping same-store sales and said that CEO Steve Odland was leaving to take the reins at Office Depot. Yet Fried says that AutoZone's fundamental outlook remains strong. Fiscal 2005 profits are projected to grow better than 13%, and the stock now trades for just 11.4 times those estimated earnings. Buyback or not, that sounds like a bargain.